Investment market updates

A good year for equity investors

Share (equity) markets had a good 2024 with many markets reaching new highs. The largest global share market, the US, was up 23% as measured by the S&P 500 Index. This impressive return followed a similar rise in 2023, and is the first time the S&P 500 Index has seen returns of 20%+ in consecutive calendar years since the late 1990s.

If the world’s largest economy and share market is performing well, usually other markets follow suit. In the UK, the FTSE 100 Index broke through the 8,000 level for the first time, ending the year at 8,173. But returns were modest compared to the US - 9.5% when factoring in dividends (as measured by the wider FTSE All Share Index).

A key reason for the dispersion in returns between the US and most other share markets was the big US tech firms’ performance. Investors have become increasingly excited about AI’s potential across numerous industries, and firms such as Microsoft, Alphabet and Nvidia are at the forefront of its development. The US tech firms known as the ‘magnificent seven’ returned over 60% in aggregate in 2024, off the back of even stronger returns (75%) the year before – an incredible run which is unlikely to be repeated in 2025.

Political change

Trump and Labour election victories brought a change in administration on both sides of the Atlantic. The Trump/Republican victory was well received by investment markets, as he is seen to be pro-growth and big-tech, evidenced by the high-profile role afforded to Elon Musk.

Trump’s intention to revitalise domestic manufacturing by penalising imports plays into the popular vote, but could be a threat to global economic growth. With Trump promising a range of tariffs aimed at China and beyond, higher input prices could stifle the ability of the US Federal Reserve to make further meaningful cuts in interest rates in 2025. Interest rates being ‘higher for longer’ would act as a brake on economic growth.

In the UK, Labour declared a £22bn ‘black hole’ in public finances to pave the way for tax rises in their first budget in November. Their pre-election pledge not to raise taxes on working people saw a rise in employer national insurance (NI) contributions. Businesses have since warned the rise in NI will mean higher prices, which will curtail the ability of the Bank of England (BoE) to cut interest rates quicker, and greater unemployment which will damage the UK economy. One of Labour’s key goals is to get the UK economy growing - latest data shows virtually no growth in the second half of 2024. This will be a key yardstick for how UK voters appraise their performance.

UK inflation back above 2% target

Inflation rose above the 2% target for the 12 months to end November, to 2.6%, having temporarily dipped below it. The BoE twice cut interest rates (from 5.25% to 4.75%) in the second half of 2024, with markets pricing in two to three further 0.25% reductions in 2025, where previously hopes had been for rates to fall below 4% by the end of 2025.

It is the rise in inflation, and the expectation that the NI rises will further add to it, that’s pared back expectations for deeper interest rate cuts this year and next. However, on the flipside, the no/ low growth within the economy may tip the balance back in favour of further reductions, to stimulate growth and avoid recession. As ever, a fine balancing act for the BoE, with competing pressures.

Virgin Money investment funds

Returns over 2024 ranged from a small loss on the Bond Fund (-0.5%) to strong gains on the Global Share Fund (+17.7%).

Most of our investment funds benefit from a global investment approach, with only the UK Index Tracker Fund (up 9% for the period) investing only in the UK. The strong returns from US shares helped boost returns for Growth Fund 3 (‘Adventurous approach’) and the Global Share Fund in particular.

Our Cautious, Balanced and Adventurous approaches grew 4.4%, 8.4% and 11.7% respectively, during a period when taking on risk was rewarded. Shares outperformed bonds and riskier bonds, such as high yield corporate bonds, outperformed government bonds. All three growth approaches maintained risk within target levels, and also invested in accordance with our Responsible Investing policy, so minimising investment in industries such as tobacco and coal.

The Climate Change Fund however had a disappointing year in terms of the financial return, growing by just 3.4%. The fund invests in companies developing products and services to tackle climate change and other environmental factors. The cancellation of some offshore wind projects in the US plus the Trump victory weighed on company valuations, particularly those focused on renewable energy.

You can see the return for each of our funds over the last five years on each fund’s web page.